With crypto trading volumes down significantly in the first quarter of the year, investors knew crypto stocks would be facing headwinds as they reported their first-quarter earnings results. The bank Silvergate Capital (SI +77.81%) was no exception, with the platform that drives much of its core business model tied to crypto spot trading volumes. But despite the weaker volumes seen in the first three months of the year, not only did Silvergate beat quarterly earnings estimates nicely, but it also continued to show that the bank can grow even when conditions in the broader crypto market aren't necessarily favorable.
Growing its ecosystem
Silvergate operates a real-time payments system called the Silvergate Exchange Network (SEN), which allows multiple parties on the network to clear and settle payment transactions instantly. SEN is particularly helpful for institutional crypto traders and crypto exchanges because while cryptocurrencies trade around the clock, the U.S. payments system does not operate in real time. Considering that SEN volume, which powers Silvergate's whole business model, is linked to crypto spot trading volume, I didn't exactly know what to expect for the quarter. But while transaction volume across SEN fell in the first quarter, the bank continued to grow the network and show that SEN still has a lot of interest.
Image source: Silvergate Capital.
SEN transfer volume only came in at $142 billion for the quarter, which is the lowest seen in the last five quarters. However, Silvergate added 122 new digital currency customers to SEN in Q1, which is the most it's done in the last five quarters. Silvergate was the first bank to offer this kind of real-time payments platform, giving it a first-mover advantage. As the network grows, it only becomes more appealing for more companies to join because there are more parties to interact with.
OTC: SI
Key Data Points
Silvergate's chief executive officer, Alan Lane, said volatility in crypto prices doesn't really affect customer growth on the platform because it can take a fair amount of time to onboard companies onto the network and because companies joining are taking a long view on cryptocurrencies. Lane also said lower crypto prices should in fact lead to more customers joining because it's an opportunity to get in on crypto at a better entry point if you missed one of the earlier booms, but it really doesn't work out that way, either.
Image source: Getty Images.
Also in the quarter, Silvergate boosted its SEN Leverage product, a line of credit in U.S. dollars collateralized by Bitcoin, from $571 million in total balances outstanding at the end of 2021 to close to $1.1 billion in the first quarter of 2022. The quarter included a $205 million loan to MacroStrategy, a division of the company MicroStrategy, which acquires and holds Bitcoin. SEN Leverage enables Bitcoin-heavy firms to essentially stake their Bitcoin for U.S. dollars that they can use to expand their business, making them more capital efficient. This use case also appeared to hold strong during a quarter of weaker crypto trading volume.
Finally, despite the weaker crypto trading volume, Silvergate grew profits in the first quarter nicely, generating nearly $25 million, or $0.79 earnings per share in the quarter, up from the preceding quarter and year over year. The main reason for the increase in profits is because SEN customers bring lots of deposits to the bank. With the Federal Reserve beginning to raise its benchmark overnight lending rate and longer-term interest rates rising in the first quarter as well, Silvergate is able to deploy those deposits into higher-yielding bonds, resulting in higher profits.
One reason to like this stock
The fact that crypto trading volume came in low during the first quarter and Silvergate still added SEN customers and reported higher profit is one reason I like this stock. Yes, crypto trading volumes influence the bank's business but it is not the only factor. Silvergate's clients are thinking about crypto on a long-term basis and I would expect the bank to have a strong year as higher interest rates continue to boost profits.
